-Robert Orben
There is one last issue to settle before we move on to evaluating hypothetical purchases and their true cost. We must discover the true value of your dollar in terms of hours of work. We talked about this in our last post but we need to more fully explore this concept before continuing. A common mistake someone that makes $25 an hour may make when considering the "true" cost of a $200 iPod is thinking "What the heck, it's only eight hours of work, I'll make that on Monday." But is this really the case? We must more fully consider this scenario. Does someone who makes $25 an hour really make $200 on Monday? Well yes, and no. It is true that nominally they will make $200 but are they really netting $200 for eight hours of work? Lets explore a typical situation.
Hourly Rate: $25
Weekly Gross: $1000
SS 6.2% of 1000: ($62)
Medicare 1.145% of $1000 : ($14.50)
Retirement Contribution 10% of $1000: ($100)
FIT 25% of $900: ($180)
NC SIT 6% $900: ($54)
NET PAY: $589.50
Net hourly Rate: $14.73
So the iPod really costs you 13.577 hours of work, right? but wait...now that we have our net pay we have to figure fixed expenses. Estimates here should be used based on your current situation. Obviously these figures are going to vary widely depending on the individual. Don't forget to include items that may not occur every month or week like insurance payments and savings for emergencies.
NET PAY:589.50
Housing ($800/mo): $185/wk
Transportation: $50
Utilities: $50
Food: $100
Misc: $50
Emergency Savings Fund: $20
NET after fixed expenses: $154.50
NET disposable income after expense/HR: $3.86
This situation ignores any debt payments to credit cards or cars. It also does not count any additional savings other than saving for an emergency fund and a pre-tax retirement account. EVERYONE should know their disposable income per week/month. Be honest with yourself! IF this number is negative then you are either the U.S. Government or headed for bankruptcy. In this hypothetical situation the true cost of that $200 iPod is not just eight hours of work but actually 51.8 hours of work or 1.5 weeks worth of disposable income. One way to make this calculation much easier for yourself is to make a flexible spending account where you save a certain amount every month (say $100 a week/$400 a month) that is used to build reserves for the next big purchase. That way when you look at your next purchase it is easy to translate into weeks/months. A $2,000 TV would be 20 weeks of savings or a $500 trip would be 5 weeks of savings. It should be stressed that this is not considered SAVINGS since your eventual goal is to spend the money not save it for the long term. DO NOT BUY ANYTHING until your savings has reached a level to where you can afford it. If you follow this disciplined approach several things will happen: the purchases you do make will be a lot more meaningful, you will probably make a lot less split second decisions you later regret and you will probably find your reserve account will build up a sizable balance giving you the freedom to buy whatever you want or go where ever you want, with the satisfaction of knowing that you earned it! It's like the reverse of a credit card, except you don't earn 19.96 APR on your savings account (unfortunately the bank takes the difference).
Once you perform this exercise on your own situation you may discover something else. Anything you can do to boost your income above your fixed expenses will result almost a dollar for dollar addition to your disposable income. For example, if in the hypothetical situation above the person worked an extra five hours of overtime that week they could pocket an extra $187.50 pre tax above fixed expenses. By the same token anything you can do to reduce your fixed costs is even better because it results in a dollar for dollar addition to your weekly disposable income. Reducing fixed expenses is better than "working" harder to make more money since any additional money you make will be taxed but a reduction in expenses is not taxed.
Another way to look at this is figure out how many hours a week it takes you to "get even" in other words how many hours of work a week it takes to cover your fixed costs. In the situation above it takes the person 33.82 hours to cover all the weekly costs. The last 6.18 hours are "profit." (6.18*25=$154.50).
Go through this exercise on your own to find your magic numbers. If it a depressing situation the good news is that it's your life and you can change it. Take control of yourself, eliminate those pesky reoccurring expenses, setup a flexible savings account and reap the benefits of living life in the black. Be the person earning interest not paying it.
**EDIT** One of our readers was quick to add some very important aspects to calculating your "hourly" wage.
To figure your true hourly wage, I feel one should also calculate the time spent getting to and from work, the cost of getting there and the time spent getting ready for and winding down from work. If one was not working this time, this time and money would not be spent. So if you add all the hours each day getting ready for work + getting to work + working + getting home+ training + research/studying while at home, you will have the true hours that you spend related to work. If you weren’t doing that job you wouldn’t spend the time. Let’s call this number RELATED WORK TIME. Now let’s take the cost of working such as transportation costs + parking + tolls + any special expenses such as clothes you would ordinarily wear, suits come to mind, + tools + certifications + professional organizations + licenses + taxes + SSI + Medicare etc. Let’s call this number WORK RELATED EXPENSE.
I propose the equation would look somewhat like this:
(GROSS INCOME – WORK RELATED EXPENSES) / RELATED WORK TIME
Figuring these expenses and additional time spent will help give you an even more accurate picture of just how much time you really spend "working" and give you a better approximation of the "value" of your time. Thanks for pointing this out.
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TRC
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